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Table of Contents

 

 

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2014

 

COMMISSION FILE NUMBER 0-12422

 

MAINSOURCE FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)

 

INDIANA

 

35-1562245

(State or other jurisdiction of

 

(IRS Employer

incorporation or organization)

 

Identification No.)

 

 

 

2105 NORTH STATE ROAD 3 BYPASS, GREENSBURG,

 

 

INDIANA

 

47240

(Address of principal executive offices)

 

(Zip Code)

 

(812) 663-6734

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report.)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

 

As of August 8, 2014 there were outstanding 20,459,263 shares of common stock, without par value, of the registrant.

 

 

 


 



Table of Contents

 

MAINSOURCE FINANCIAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands except per share data)

 

Item 1.  Financial Statements

 

 

 

(Unaudited)

 

 

 

 

 

June 30,

 

December 31,

 

 

 

2014

 

2013

 

Assets

 

 

 

 

 

Cash and due from banks

 

$

64,729

 

$

55,826

 

Money market funds and federal funds sold

 

8,042

 

5,494

 

Cash and cash equivalents

 

72,771

 

61,320

 

Interest bearing time deposits

 

980

 

 

Securities available for sale

 

852,374

 

891,106

 

Loans held for sale

 

5,346

 

5,999

 

Loans, net of allowance for loan losses of $23,867 and $27,609

 

1,676,931

 

1,644,317

 

Restricted stock, at cost

 

15,625

 

15,629

 

Premises and equipment, net

 

54,035

 

55,957

 

Goodwill

 

64,900

 

64,900

 

Purchased intangible assets

 

4,261

 

5,125

 

Cash surrender value of life insurance

 

61,354

 

61,292

 

Interest receivable and other assets

 

52,440

 

54,219

 

Total assets

 

$

2,861,017

 

$

2,859,864

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Deposits

 

 

 

 

 

Noninterest bearing

 

$

455,496

 

$

436,550

 

Interest bearing

 

1,800,849

 

1,764,078

 

Total deposits

 

2,256,345

 

2,200,628

 

Other borrowings

 

30,735

 

38,594

 

Federal Home Loan Bank (FHLB) advances

 

179,424

 

247,858

 

Subordinated debentures

 

41,239

 

46,394

 

Other liabilities

 

25,893

 

20,864

 

Total liabilities

 

2,533,636

 

2,554,338

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

Preferred stock, no par value: Authorized shares - 400,000; Issued shares — 0; Outstanding shares — 0; Aggregate liquidation preference — $0

 

 

 

Common stock $.50 stated value: Authorized shares - 100,000,000; Issued shares — 20,994,415 and 20,940,298; Outstanding shares — 20,458,763 and 20,417,224

 

10,529

 

10,508

 

Treasury stock — 535,652 and 523,074 at cost

 

(8,708

)

(8,495

)

Additional paid-in capital

 

225,290

 

224,793

 

Retained earnings

 

87,475

 

77,586

 

Accumulated other comprehensive income

 

12,795

 

1,134

 

Total shareholders’ equity

 

327,381

 

305,526

 

Total liabilities and shareholders’ equity

 

$

2,861,017

 

$

2,859,864

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3



Table of Contents

 

MAINSOURCE FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Dollar amounts in thousands except per share data)

 

 

 

(unaudited)

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

19,143

 

$

19,128

 

$

38,251

 

$

38,615

 

Securities

 

6,082

 

5,886

 

12,401

 

11,694

 

Other interest income

 

22

 

22

 

35

 

43

 

Total interest income

 

25,247

 

25,036

 

50,687

 

50,352

 

Interest expense

 

 

 

 

 

 

 

 

 

Deposits

 

908

 

1,275

 

1,920

 

2,633

 

Federal Home Loan Bank advances

 

866

 

776

 

1,700

 

1,691

 

Subordinated debentures

 

312

 

434

 

663

 

863

 

Other borrowings

 

17

 

16

 

39

 

32

 

Total interest expense

 

2,103

 

2,501

 

4,322

 

5,219

 

Net interest income

 

23,144

 

22,535

 

46,365

 

45,133

 

Provision for loan losses

 

750

 

1,000

 

1,500

 

2,734

 

Net interest income after provision for loan losses

 

22,394

 

21,535

 

44,865

 

42,399

 

Non-interest income

 

 

 

 

 

 

 

 

 

Mortgage banking

 

1,662

 

1,914

 

2,978

 

3,943

 

Trust and investment product fees

 

1,146

 

1,269

 

2,416

 

2,304

 

Service charges on deposit accounts

 

5,307

 

5,124

 

9,892

 

9,610

 

Net realized gains/(loss) on securities (includes ($4) and ($4) accumulated other comprehensive income (AOCI) reclassifications for unrealized losses on available-for-sale securities in 2014 and includes ($11) and $833 accumulated other comprehensive income reclassifications for unrealized net gains/(losses) on available-for-sale securities in 2013)

 

(4

)

(11

)

(4

)

833

 

Increase in cash surrender value of life insurance

 

323

 

350

 

650

 

692

 

Interchange income

 

2,024

 

1,902

 

3,759

 

3,513

 

Gain/(loss) on sale and write-down of OREO

 

39

 

(22

)

(38

)

(318

)

Other income

 

708

 

835

 

825

 

1,049

 

Total non-interest income

 

11,205

 

11,361

 

20,478

 

21,626

 

Non-interest expense

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

13,699

 

12,799

 

27,272

 

26,317

 

Net occupancy

 

1,773

 

1,718

 

3,912

 

3,578

 

Equipment

 

2,391

 

2,440

 

4,899

 

4,795

 

Intangibles amortization

 

432

 

478

 

864

 

958

 

Telecommunications

 

424

 

450

 

868

 

906

 

Stationery printing and supplies

 

272

 

262

 

559

 

636

 

FDIC assessment

 

365

 

467

 

800

 

904

 

Marketing

 

760

 

964

 

1,358

 

2,009

 

Collection expense

 

394

 

859

 

831

 

1,809

 

Prepayment penalty on FHLB advance

 

 

 

 

2,239

 

Consultant expense

 

350

 

375

 

700

 

750

 

Interchange expense

 

540

 

464

 

1,061

 

913

 

Other expenses

 

2,394

 

2,579

 

4,884

 

5,169

 

Total non-interest expense

 

23,794

 

23,855

 

48,008

 

50,983

 

Income before income tax

 

9,805

 

9,041

 

17,335

 

13,042

 

Income tax expense (includes ($1) and ($1) income tax expense from AOCI reclassification in 2014 and ($4) and $292 income tax expense from AOCI reclassification items in 2013)

 

2,051

 

1,717

 

3,356

 

1,727

 

Net income

 

$

7,754

 

$

7,324

 

$

13,979

 

$

11,315

 

Preferred dividends and discount accretion

 

 

(203

)

 

(405

)

Net income available to common shareholders

 

$

7,754

 

$

7,121

 

$

13,979

 

$

10,910

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.10

 

$

0.06

 

$

0.20

 

$

0.12

 

Net income per common share — basic

 

$

0.38

 

$

0.35

 

$

0.68

 

$

0.54

 

Net income per common share — diluted

 

$

0.38

 

$

0.35

 

$

0.68

 

$

0.53

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4



Table of Contents

 

MAINSOURCE FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

(Dollar amounts in thousands except per share data)

 

 

 

(unaudited)

 

(unaudited)

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Net income

 

$

7,754

 

$

7,324

 

$

13,979

 

$

11,315

 

Other comprehensive income/(loss):

 

 

 

 

 

 

 

 

 

Unrealized holding gains/(losses) on securities available for sale

 

9,289

 

(22,003

)

17,636

 

(27,327

)

Reclassification adjustment for (gains)/losses included in net income

 

4

 

11

 

4

 

(833

)

Tax effect

 

(3,058

)

7,698

 

(5,979

)

9,857

 

Other comprehensive income/(loss)

 

6,235

 

(14,294

)

11,661

 

(18,303

)

Comprehensive income/(loss)

 

$

13,989

 

$

(6,970

)

$

25,640

 

$

(6,988

)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5



Table of Contents

 

MAINSOURCE FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands)

 

 

 

(unaudited)

 

 

 

Six months ended

 

 

 

June 30

 

 

 

2014

 

2013

 

Operating Activities

 

 

 

 

 

Net income

 

$

13,979

 

$

11,315

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Provision for loan losses

 

1,500

 

2,734

 

Depreciation expense

 

2,891

 

2,795

 

Securities amortization, net

 

967

 

1,878

 

Stock based compensation expense

 

384

 

325

 

Stock portion of director retainer fee expense

 

180

 

187

 

Amortization of purchased intangible assets

 

864

 

958

 

Amortization of mortgage servicing rights

 

491

 

926

 

Earnings on cash surrender value of life insurance policies

 

(650

)

(692

)

(Recovery) of valuation allowance on mortgage servicing rights

 

 

(425

)

Prepayment penalty on FHLB advance

 

 

2,239

 

Securities (gains)/losses, net

 

4

 

(833

)

Loss on sale and write-down of OREO

 

38

 

318

 

Gain on loans sold

 

(1,729

)

(3,535

)

Loans originated for sale

 

(68,871

)

(139,789

)

Proceeds from loan sales

 

71,253

 

148,346

 

Change in other assets and liabilities

 

(214

)

1,067

 

Net cash provided by operating activities

 

21,087

 

27,814

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Net change in interest bearing time deposits

 

(980

)

 

Purchases of securities available for sale

 

(19,473

)

(164,209

)

Proceeds from calls, maturities, and payments on securities available for sale

 

52,902

 

72,083

 

Proceeds from sales of securities available for sale

 

21,972

 

78,354

 

Proceeds from sale of OREO

 

2,258

 

3,264

 

Proceeds from life insurance benefit

 

588

 

 

Loan originations and payment, net

 

(36,013

)

(38,945

)

Purchases of premises and equipment

 

(969

)

(4,182

)

Purchase of life insurance policies

 

 

(504

)

Proceeds from redemption of restricted stock

 

4

 

9

 

Net cash provided/(used) by investing activities

 

20,289

 

(54,130

)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Net change in deposits

 

55,717

 

(1,769

)

Net change in other borrowings

 

(7,859

)

(922

)

Repayment of FHLB advances

 

(588,434

)

(166,926

)

Proceeds from FHLB advances

 

520,000

 

190,000

 

Purchase of treasury shares

 

(319

)

(204

)

Proceeds from exercise of stock options, including tax benefit

 

60

 

316

 

Repayment of subordinated debentures, net

 

(5,000

)

 

Cash dividends on preferred stock

 

 

(378

)

Cash dividends on common stock

 

(4,090

)

(2,443

)

Net cash (used)/provided by financing activities

 

(29,925

)

17,674

 

Net change in cash and cash equivalents

 

11,451

 

(8,642

)

Cash and cash equivalents, beginning of year

 

61,320

 

65,650

 

Cash and cash equivalents, end of period

 

$

72,771

 

$

57,008

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

Interest paid

 

$

4,547

 

$

5,508

 

Income taxes paid

 

2,250

 

1,380

 

Supplemental non cash disclosure

 

 

 

 

 

Loan balances transferred to foreclosed real estate

 

$

1,899

 

$

2,088

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6


 


Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands except per share data)

 

NOTE 1 - BASIS OF PRESENTATION

 

The significant accounting policies followed by MainSource Financial Group, Inc. (“Company”) for interim financial reporting are consistent with the accounting policies followed for annual financial reporting. The consolidated interim financial statements have been prepared according to accounting principles generally accepted in the United States of America and in accordance with the instructions for Form 10-Q. The interim statements do not include all information and footnotes normally included in the annual financial statements. All adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods reported have been included in the accompanying unaudited consolidated financial statements and all such adjustments are of a normal recurring nature. Some items in prior period financial statements were reclassified to conform to current presentation. It is suggested that these consolidated financial statements and notes be read in conjunction with the financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

Adoption of New Accounting Standards

 

In June 2014, the FASB issued ASU No. 2014-11 “Transfers and Servicing (Topic 860) - Repurchase to Maturity Transactions, Repurchase Financings, and Disclosures.” ASU 2014-11 aligns the accounting for repurchase to maturity transactions and repurchase agreements executed as a repurchase financing with the accounting for other typical repurchase agreements. Going forward, these transactions would all be accounted for as secured borrowings. ASU 2014-11 is effective for the first interim or annual period beginning after December 15, 2014. In addition the disclosure of certain transactions accounted for as a sale is effective for the first interim or annual period beginning on or after December 15, 2014, and the disclosure for transactions accounted for as secured borrowings is required for annual periods beginning after December 15, 2014, and interim periods beginning after March 15, 2015. Early adoption is prohibited. The Company is currently assessing the impact of ASU 2014-11.

 

In May 2014, the FASB issued ASU No. 2014-09 “Revenue from Contracts with Customers (Topic 606).” The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The amendments can be applied retrospectively to each prior reporting period or retrospectively with the cumulative effect of initially applying this Update recognized at the date of initial application. Early application is not permitted. The Company is currently assessing the impact of ASU 2014-09.

 

In January 2014, the FASB issued ASU No. 2014-04 “Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40) - Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure.” ASU 2014-04 clarifies when an in substance repossession or foreclosure occurs and requires interim and annual disclosures of the amount of foreclosed residential real estate property and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. ASU 2014-04 is effective either on a modified retrospective transition method or a prospective transition method for interim and annual periods beginning after December 15, 2014. Early adoption is permitted. The Company is currently assessing the impact of ASU 2014-04.

 

NOTE 2 - STOCK PLANS AND STOCK BASED COMPENSATION

 

From time to time, common stock and options to buy common stock are granted to directors and officers of the Company under the MainSource Financial Group, Inc. 2007 Stock Incentive Plan (the “2007 Stock Incentive Plan”), which was adopted and approved by the Board of Directors of the Company on January 16, 2007. The plan was effective upon the approval of the plan by the Company’s shareholders, which occurred on April 26, 2007 at the Company’s annual meeting of shareholders. The 2007 Stock Incentive Plan provides for the grant of incentive stock options, nonstatutory stock options, stock bonuses and restricted stock awards. Incentive stock options may be granted only to employees. An aggregate of 650,000 shares of common stock are reserved for issuance under the 2007 Stock Incentive Plan. Shares issuable under the 2007 Stock Incentive Plan will be authorized from unissued shares of common stock or treasury shares. The 2007 Stock Incentive Plan is in addition to, and not in replacement of, the MainSource Financial Group, Inc. 2003 Stock Option Plan (“the 2003 Option Plan”), which was approved by the Company’s Board of Directors on January 21, 2003, and was effective upon approval by the Company’s shareholders on April 23, 2003. The 2003 Option Plan provided for the grant of up to 607,754 incentive and nonstatutory stock options. Upon the approval of the 2007 Stock Incentive Plan, no further awards of options may be made under the 2003 Option Plan. Unexercised options which were previously issued under the 2003 Option Plan have not been terminated, but will otherwise continue in accordance with the 2003 Option Plan and the agreements pursuant to which the options were issued. All stock options granted under either the 2003 Option Plan or the 2007 Stock Incentive Plan have an exercise price that is at least equal to the fair market value of the Company’s common stock on the date the options were granted. The maximum option term is ten years, and options vest immediately for the directors’ grant and over four years for the officers’ grant, except as otherwise determined by the Executive Compensation Committee of the Board of Directors.

 

All share-based payments to employees, including grants of employee stock options, are recognized as compensation expense over the service period (generally the vesting period) in the consolidated financial statements based on their fair values.  For options with graded vesting, the Company values the stock option grants and recognizes compensation expense as if each vesting portion of the award was a single award.

 

7



Table of Contents

 

The following table summarizes stock option activity:

 

 

 

Six Months Ended
June 30, 2014

 

 

 

Shares

 

Weighted
Average
Exercise Price

 

Outstanding, beginning of year

 

402,139

 

$

13.79

 

Granted

 

31,327

 

16.11

 

Exercised

 

(6,500

)

9.24

 

Forfeited or expired

 

(44,276

)

18.86

 

Outstanding, period end

 

382,690

 

$

13.48

 

Options exercisable at period end

 

255,704

 

$

13.43

 

Fully vested and expected to vest

 

370,706

 

$

13.44

 

 

The following table details stock options outstanding:

 

 

 

June 30,
2014

 

December 31,
2013

 

Stock options vested and currently exercisable:

 

 

 

 

 

Number

 

255,704

 

295,680

 

Weighted average exercise price

 

$

13.43

 

$

14.21

 

Aggregate intrinsic value

 

$

1,132

 

$

1,327

 

Weighted average remaining life (in years)

 

3.7

 

3.9

 

 

The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the market price of our common stock as of the reporting date. The Company recorded $41 and $82 in stock compensation expense during the three and six months ended June 30, 2014 and $36 and $72 in stock compensation expense during the three and six months ended June 30, 2013 to salaries and employee benefits. There were 29,389 options granted in the first quarter of 2014 and 1,938 options granted in the second quarter of 2014.  2,500 and 49,783 options were granted in the first and second quarters of 2013.  In order to calculate the fair value of the options granted in 2014, the following weighted-average assumptions were used as of the grant dates:  risk free interest rate of 2.07%, expected option life 7.0 years, expected price volatility 28.1%, and dividend yield of 2.49%.  The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes based stock option valuation model. This model requires the input of subjective assumptions that will usually have a significant impact on the fair value estimate. Expected volatilities are based on historical volatility of the Company’s stock, and other factors. Expected dividends are based on dividend trends and the market price of the Company’s stock price at grant. The Company uses historical data to estimate option exercises within the valuation model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

 

Unrecognized stock option compensation expense related to unvested awards for the remainder of 2014 and beyond is estimated as follows:

 

Year

 

(in thousands)

 

July 2014 - December 2014

 

$

77

 

2015

 

170

 

2016

 

93

 

2017

 

38

 

 

During the second quarter of 2013, the Executive Compensation Committee of the Board of Directors of the Company granted restricted stock awards in lieu of cash awards to certain executive officers pursuant to the Company’s long-term incentive plan (the “LTIP”). Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at the issue date. The value of the awards was determined by multiplying the award amount by the closing price of a share of Company common stock on the grant date, April 10, 2013 ($13.67). The restricted stock awards vest as follows — 80% on the second anniversary of the date of grant and 20% on the third anniversary of the date of grant. A total of 10,792 shares of common stock of the Company were granted in 2013.

 

Also in 2013 and the first and second quarters of 2014, the Executive Compensation Committee of the Board of Directors of the Company granted restricted stock awards to certain executive officers and other employees pursuant to the Company’s LTIP. Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at the issue date. The value of the awards was

 

8



Table of Contents

 

determined by multiplying the award amount by the closing price of a share of Company common stock on the grant date. The restricted stock awards vest as follows — 100% on the third anniversary of the date of grant. A total of 21,726 shares of common stock were granted in the first quarter of 2014 at a weighted average cost of $16.12 per share; 10,611 shares of common stock were granted in the second quarter of 2014 at a weighted average cost of $16.53; and 47,971 shares of common stock of the Company were granted in 2013.

 

A summary of changes in the Company’s non-vested restricted shares for 2014 follows:

 

 

 

Restricted
Shares

 

Weighted Average
Grant Date
Fair Value

 

Non-vested at January 1, 2014

 

105,283

 

$

12.85

 

Granted

 

32,337

 

16.25

 

Vested

 

(47,697

)

11.43

 

Forfeited

 

 

 

Non-vested at June 30, 2014

 

89,923

 

$

14.82

 

 

As of June 30, 2014, there was $903 of total unrecognized compensation costs related to non-vested restricted stock awards granted under the 2007 Stock Incentive Plan that will be recognized over the remaining vesting period of approximately 1.6 years. The recognized compensation costs related to the 2007 Stock Incentive Plan were $68 and $302 for the three and six month periods ending June 30, 2014 and $141 and $246 for the three and six month periods ending June 30, 2013.

 

In the first quarter of 2013, members of the Board of Directors received the fourth installment of Company common stock for their annual retainer for the previous Board year that ended on the date of the 2013 annual meeting of shareholders. In the second quarter of 2013, members of the Board of Directors received their entire annual retainer in restricted Company stock for the following Board year ended with the 2014 annual meeting of shareholders. The 2013 award vested quarterly for all directors who remained on the Board of Directors on the vesting date, with 25% of the award vesting on each of May 1, August 1, and November 1, 2013, and February 1, 2014. The value of the 2013 retainer award was determined by multiplying the award amount by the closing price of the stock on the issuance date.

 

In the second quarter of 2014, members of the Board of Directors received their entire annual retainer in restricted Company stock for the following Board year that ends with the 2015 annual meeting of shareholders. The 2014 award vested quarterly for all directors who remained on the Board of Directors on the vesting date, with 25% of the award vesting on each of May 1, August 1, and November 1, 2014, and February 1, 2015. The value of the 2014 retainer award was determined by multiplying the award amount by the closing price of the stock on the issuance date.

 

For all awards, other expense is recognized over the three month period of the awards based on the fair value of the stock at the issue dates. Shares awarded by quarter were as follows:

 

Quarter

 

Shares

 

Price per Share

 

2013

1Q

 

7,200

 

$

13.38

 

 

2Q

 

26,100

 

$

13.79

 

2014

2Q

 

21,780

 

$

16.53

 

 

A total of $91 and $90 was recognized as other expense in the second quarter of 2014 and 2013 respectively for these grants and $180 and $187 was recognized in the first six months of 2014 and 2013 respectively.

 

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NOTE 3 - SECURITIES

 

The amortized cost and fair value of securities available for sale and related unrealized gains/losses recognized in accumulated other comprehensive income was as follows:

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

As of June 30, 2014

 

 

 

 

 

 

 

 

 

Available for Sale

 

 

 

 

 

 

 

 

 

U. S. government agency

 

$

638

 

$

5

 

$

 

$

643

 

State and municipal

 

307,124

 

18,699

 

(566

)

325,257

 

Mortgage-backed securities-residential (GSE’s)

 

150,596

 

4,205

 

(920

)

153,881

 

Collateralized mortgage obligations (GSE’s)

 

366,429

 

2,760

 

(4,795

)

364,394

 

Equity securities

 

4,689

 

 

 

4,689

 

Other securities

 

3,512

 

 

(2

)

3,510

 

Total available for sale

 

$

832,988

 

$

25,669

 

$

(6,283

)

$

852,374

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2013

 

 

 

 

 

 

 

 

 

Available for Sale

 

 

 

 

 

 

 

 

 

U. S. government agency

 

$

793

 

$

5

 

$

 

$

798

 

State and municipal

 

321,151

 

12,173

 

(2,212

)

331,112

 

Mortgage-backed securities-residential (GSE’s)

 

186,054

 

3,175

 

(3,800

)

185,429

 

Collateralized mortgage obligations (GSE’s)

 

372,896

 

1,642

 

(9,229

)

$

365,309

 

Equity securities

 

4,939

 

 

 

4,939

 

Other securities

 

3,527

 

 

(8

)

3,519

 

Total available for sale

 

$

889,360

 

$

16,995

 

$

(15,249

)

$

891,106

 

 

The amortized cost and fair value of the investment securities portfolio are shown by expected maturity.  Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.  Securities not due at a single maturity or with no maturity are shown separately.

 

 

 

Available
for Sale

 

June 30, 2014

 

Amortized Cost

 

Fair Value

 

Within one year

 

$

14,698

 

$

14,902

 

One through five years

 

48,256

 

50,133

 

Six through ten years

 

123,579

 

130,050

 

After ten years

 

124,741

 

134,325

 

Mortgage-backed securities-residential (Government Sponsored Entity)

 

150,596

 

153,881

 

Collateralized mortgage obligations (Government Sponsored Entity)

 

366,429

 

364,394

 

Equity securities

 

4,689

 

4,689

 

Total available for sale securities

 

$

832,988

 

$

852,374

 

 

Proceeds from sales of securities available for sale were $21,972 and $78,354 for the six months ended June 30, 2014 and 2013, respectively. Gross gains of $542 and $910 and gross losses of $546 and $77 were realized on these sales during 2014 and 2013, respectively.

 

Proceeds from sales of securities available for sale were $21,972 and $964 for the three months ended June 30, 2014 and 2013, respectively. Gross gains of $542 and $11 and gross losses of $546 and $22 were realized on these sales during 2014 and 2013, respectively.

 

Below is a summary of securities with unrealized losses as of June 30, 2014 and December 31, 2013 presented by length of time the securities have been in a continuous unrealized loss position.

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

June 30, 2014
Description of securities

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

State and municipal

 

$

2,186

 

$

(9

)

$

21,018

 

$

(557

)

$

23,204

 

$

(566

)

Mortgage-backed securities-residential (GSE’s)

 

 

 

51,920

 

(920

)

51,920

 

(920

)

Collateralized mortgage obligations (GSE’s)

 

27,084

 

(290

)

156,962

 

(4,505

)

184,046

 

(4,795

)

Other securities

 

 

 

999

 

(2

)

999

 

(2

)

Total temporarily impaired

 

$

29,270

 

$

(299

)

$

230,899

 

$

(5,984

)

260,169

 

$

(6,283

)

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

December 31, 2013
Description of securities

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

State and municipal

 

$

31,660

 

$

(1,791

)

$

4,153

 

$

(421

)

$

35,813

 

$

(2,212

)

Mortgage-backed securities-residential (GSE’s)

 

114,036

 

(3,800

)

 

 

114,036

 

(3,800

)

Collateralized mortgage obligations (GSE’s)

 

267,579

 

(9,040

)

4,100

 

(189

)

271,679

 

(9,229

)

Other securities

 

 

 

993

 

(8

)

993

 

(8

)

Total temporarily impaired

 

$

413,275

 

$

(14,631

)

$

9,246

 

$

(618

)

$

422,521

 

$

(15,249

)

 

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Other-Than-Temporary-Impairment

 

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Investment securities are generally evaluated for OTTI under ASC 320. However, certain purchased beneficial interests, including non-agency mortgage-backed securities, asset-backed securities, and collateralized debt obligations, that had credit ratings at the time of purchase of below AA are evaluated using the model outlined in ASC 325-10.

 

In determining OTTI under ASC 320, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

 

When OTTI occurs under either model, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

 

As of June 30, 2014, the Company’s securities portfolio consisted of 1,012 securities, 112 of which were in an unrealized loss position.  Unrealized losses on state and municipal securities of $566 have not been recognized into income because management has the ability to hold for a period of time sufficient to allow for any anticipated recovery in fair value and it is unlikely that management will be required to sell the securities before their anticipated recovery. The decline in value is primarily attributable to temporary illiquidity and the current rate environment and not necessarily the expected cash flows of the individual securities. The Company monitors the financial condition of these issuers. The fair value of these debt securities is expected to recover as the securities approach their maturity date.

 

At June 30, 2014, almost all of the mortgage-backed securities held by the Company were issued by U.S. government-sponsored entities and agencies, primarily Fannie Mae and Freddie Mac, institutions which the government has affirmed its commitment to support. Because the decline in fair value of approximately $920 is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these mortgage-backed securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2014.

 

The Company’s collateralized mortgage obligation securities portfolio includes agency collateralized mortgage obligations with a market value of $364,394 which had unrealized losses of approximately $4,795 at June 30, 2014. The Company monitors to insure it has adequate credit support and as of June 30, 2014, the Company believes there is no OTTI and does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery. All securities are investment grade.

 

The unrealized losses on other securities are related to one single issue trust preferred security and have not been recognized into income because management has the ability to hold for a period of time sufficient to allow for any anticipated recovery in fair value and it is unlikely that management will be required to sell the security before its anticipated recovery. The Company performs a quarterly review of this security and based on this review, no evidence of adverse changes in expected cash flows is anticipated. The decline in value is primarily attributable to temporary illiquidity and the financial crisis affecting these markets and not the expected cash flows of the individual security. Currently, the issuer has made all contractual payments and given no indication that it will not be able to make them into the future. The fair value of this debt security is expected to recover as the security approaches its maturity date. As of June 30, 2014, the fair value of the security was $999 with an unrealized loss of $2.

 

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NOTE 4 - LOANS AND ALLOWANCE

 

Loans were as follows:

 

 

 

June 30,
2014

 

December 31,
2013

 

Commercial

 

 

 

 

 

Commercial and industrial

 

$

193,395

 

$

180,378

 

Agricultural

 

40,087

 

30,323

 

Commercial Real Estate

 

 

 

 

 

Farm

 

74,270

 

76,082

 

Hotel

 

92,045

 

108,226

 

Construction and development

 

43,038

 

35,731

 

Other

 

558,490

 

546,970

 

Residential

 

 

 

 

 

1-4 family

 

402,188

 

403,733

 

Home equity

 

251,743

 

244,277

 

Consumer

 

 

 

 

 

Direct

 

44,762

 

45,129

 

Indirect

 

780

 

1,077

 

Total loans

 

1,700,798

 

1,671,926

 

Allowance for loan losses

 

(23,867

)

(27,609

)

Net loans

 

$

1,676,931

 

$

1,644,317

 

 

Activity in the allowance for loan losses for the six months ended June 30, 2014 and 2013 and the recorded investment of loans and allowances by portfolio segment and impairment method as of June 30, 2014 and December 31, 2013 were as follows:

 

 

 

Commercial

 

Commercial
Real Estate

 

Residential

 

Consumer

 

Total

 

Allowance for loan loss

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2014

 

$

3,291

 

$

20,210

 

$

3,409

 

$

699

 

$

27,609

 

Provision charged to expense

 

(14

)

 

963

 

551

 

1,500

 

Losses charged off

 

(149

)

(4,655

)

(1,377

)

(1,371

)

(7,552

)

Recoveries

 

73

 

1,439

 

115

 

683

 

2,310

 

Balance, June 30, 2014

 

$

3,201

 

$

16,994

 

$

3,110

 

$

562

 

$

23,867

 

 

 

 

Commercial

 

Commercial
Real Estate

 

Residential

 

Consumer

 

Total

 

Allowance for loan loss

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2013

 

$

3,894

 

$

24,157

 

$

3,180

 

$

996

 

$

32,227

 

Provision charged to expense

 

487

 

331

 

1,371

 

545

 

2,734

 

Losses charged off

 

(967

)

(4,686

)

(1,319

)

(1,500

)

(8,472

)

Recoveries

 

221

 

306

 

227

 

759

 

1,513

 

Balance, June 30, 2013

 

$

3,635

 

$

20,108

 

$

3,459

 

$

800

 

$

28,002

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

Ending Balance individually evaluated for impairment

 

$

130

 

$

730

 

$

97

 

$

 

$

957

 

Ending Balance collectively evaluated for impairment

 

3,071

 

16,264

 

3,013

 

562

 

22,910

 

Total ending allowance balance

 

$

3,201

 

$

16,994

 

$

3,110

 

$

562

 

$

23,867

 

Loans

 

 

 

 

 

 

 

 

 

 

 

Ending Balance individually evaluated for impairment

 

$

709

 

$

28,989

 

$

9,992

 

$

92

 

$

39,782

 

Ending Balance collectively evaluated for impairment

 

232,773

 

738,854

 

643,939

 

45,450

 

1,661,016

 

Total ending loan balance excludes $4,982 of accrued interest

 

$

233,482

 

$

767,843

 

$

653,931

 

$

45,542

 

$

1,700,798

 

 

12



Table of Contents

 

As of December 31, 2013

 

Commercial

 

Commercial
Real Estate

 

Residential

 

Consumer

 

Total

 

Ending Balance individually evaluated for impairment

 

$

13

 

$

1,167

 

$

105

 

$

2

 

$

1,287

 

Ending Balance collectively evaluated for impairment

 

3,278

 

19,043

 

3,304

 

697

 

26,322

 

Total ending allowance balance

 

$

3,291

 

$

20,210

 

$

3,409

 

$

699

 

$

27,609

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

 

 

 

 

 

 

 

 

 

 

Ending Balance individually evaluated for impairment

 

$

300

 

$

21,240

 

$

10,797

 

$

785

 

$

33,122

 

Ending Balance collectively evaluated for impairment

 

210,401

 

745,769

 

637,213

 

45,421

 

1,638,804

 

Total ending loan balance excludes $5,043 of accrued interest

 

$

210,701

 

$

767,009

 

$

648,010

 

$

46,206

 

$

1,671,926

 

 

The recorded investment in loans excludes accrued interest receivable due to immateriality.

 

Activity in the allowance for loan losses for the three months ended June 30, 2014 and 2013 was as follows:

 

 

 

Commercial

 

Commercial
Real Estate

 

Residential

 

Consumer

 

Total

 

Allowance for loan loss

 

 

 

 

 

 

 

 

 

 

 

Balance, April 1, 2014

 

$

3,009

 

$

20,439

 

$

3,196

 

$

603

 

$

27,247

 

Provision charged to expense

 

149

 

(393

)

718

 

276

 

750

 

Losses charged off

 

(3

)

(4,047

)

(834

)

(628

)

(5,512

)

Recoveries

 

46

 

995

 

30

 

311

 

1,382

 

Balance, June 30, 2014

 

$

3,201

 

$

16,994

 

$

3,110

 

$

562

 

$

23,867

 

 

 

 

Commercial

 

Commercial
Real Estate

 

Residential

 

Consumer

 

Total

 

Allowance for loan loss

 

 

 

 

 

 

 

 

 

 

 

Balance, April 1, 2013

 

$

4,279

 

$

23,238

 

$

3,263

 

$

948

 

$

31,728

 

Provision charged to expense

 

(38

)

93

 

740

 

205

 

1,000

 

Losses charged off

 

(696

)

(3,478

)

(621

)

(681

)

(5,476

)

Recoveries

 

90

 

255

 

77

 

328

 

750

 

Balance, June 30, 2013

 

$

3,635

 

$

20,108

 

$

3,459

 

$

800

 

$

28,002

 

 

The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2014.  Performing troubled debt restructurings totaling $6,444 were excluded as allowed by ASC 310-40.

 

June 30, 2014

 

Unpaid
Principal
Balance

 

Recorded
Investment

 

Allowance
for Loan
Losses Allocated

 

With an allowance recorded

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

Commercial and industrial

 

$

214

 

$

197

 

$

130

 

Commercial Real Estate

 

 

 

 

 

 

 

Farm

 

76

 

76

 

21

 

Hotel

 

 

 

 

 

 

 

Construction and development

 

 

 

 

Other

 

4,006

 

3,668

 

709

 

Residential

 

 

 

 

 

 

 

1-4 Family

 

837

 

797

 

92

 

Home Equity

 

171

 

171

 

5

 

Consumer

 

 

 

 

 

 

 

Direct

 

 

 

 

Subtotal — impaired with allowance recorded

 

5,304

 

4,909

 

957

 

With no related allowance recorded

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

Commercial & industrial

 

186

 

99

 

 

 

Agricultural

 

413

 

413

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

Farm

 

1,015

 

779

 

 

 

Hotel

 

11,550

 

11,550

 

 

 

Construction and development

 

84

 

78

 

 

 

Other

 

8,761

 

6,394

 

 

 

Residential

 

 

 

 

 

 

 

1-4 Family

 

7,273

 

6,445

 

 

 

Home Equity

 

2,771

 

2,579

 

 

 

Consumer

 

 

 

 

 

 

 

Direct

 

126

 

92

 

 

 

Indirect

 

 

 

 

 

Subtotal — impaired with no allowance recorded

 

32,179

 

28,429

 

 

Total impaired loans

 

$

37,483

 

$

33,338

 

$

957

 

 

13



Table of Contents

 

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2013.  Performing troubled debt restructurings totaling $6,593 were excluded as allowed by ASC 310-40.

 

December 31, 2013

 

Unpaid
Principal
Balance

 

Recorded
Investment

 

Allowance
for Loan
Losses Allocated

 

With an allowance recorded

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

Commercial and industrial

 

$

194

 

$

177

 

$

13

 

Agricultural`

 

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

Farm

 

625

 

436

 

61

 

Hotel

 

 

 

 

Construction and development

 

 

 

 

Other

 

7,309

 

6,382

 

1,106

 

Residential

 

 

 

 

 

 

 

1-4 Family

 

1,089

 

981

 

102

 

Home Equity

 

50

 

50

 

3

 

Consumer

 

 

 

 

 

 

 

Direct

 

126

 

126

 

2

 

Indirect

 

 

 

 

Subtotal — impaired with allowance recorded

 

9,393

 

8,152

 

1,287

 

With no related allowance recorded

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

Commercial & industrial

 

204

 

123

 

 

 

Agricultural

 

 

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

Farm

 

767

 

657

 

 

 

Hotel

 

 

 

 

 

Construction and development

 

942

 

795

 

 

 

Other

 

8,651

 

6,377

 

 

 

Residential

 

 

 

 

 

 

 

1-4 Family

 

8,931

 

8,007

 

 

 

Home Equity

 

1,860

 

1,759

 

 

 

Consumer

 

 

 

 

 

 

 

Direct

 

675

 

649

 

 

 

Indirect

 

11

 

10

 

 

 

Subtotal — impaired with no allowance recorded

 

22,041

 

18,377

 

 

Total impaired loans

 

$

31,434

 

$

26,529

 

$

1,287

 

 

The following tables present the average balance of impaired loans and interest income and cash basis interest recognized for the six month periods ending June 30, 2014 and June 30, 2013, excluding performing troubled debt restructurings as allowed by ASC 310-40.

 

Six months ended June 30, 2014

 

Average
Balance
Impaired Loans

 

Interest
Income
Recognized

 

Cash Basis
Income
Recognized

 

Commercial

 

 

 

 

 

 

 

Commercial & Industrial

 

$

287

 

$

8

 

$

8

 

Agricultural

 

137

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

Farm

 

945

 

 

 

Hotel

 

3,850

 

 

 

Construction and development

 

398

 

 

 

Other

 

11,324

 

71

 

71

 

Residential

 

 

 

 

 

 

 

1-4 Family

 

8,258

 

5

 

5

 

Home Equity

 

2,460

 

7

 

7

 

Consumer

 

 

 

 

 

 

 

Direct

 

330

 

5

 

5

 

Indirect

 

7

 

1

 

1

 

 

 

$

27,996

 

$

97

 

$

97

 

 

Six months ended June 30, 2013

 

Average
Balance
Impaired Loans

 

Interest
Income
Recognized

 

Cash Basis
Income
Recognized

 

Commercial

 

 

 

 

 

 

 

Commercial & Industrial

 

$

1,387

 

$

2

 

$

2

 

Agricultural

 

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

Farm

 

1,486

 

8

 

8

 

Hotel

 

1,989

 

 

 

Construction and development

 

1,864

 

1

 

1

 

Other

 

20,953

 

32

 

32

 

Residential

 

 

 

 

 

 

 

1-4 Family

 

10,706

 

3

 

3

 

Home Equity

 

2,617

 

3

 

3

 

Consumer

 

 

 

 

 

 

 

Direct

 

955

 

11

 

11

 

Indirect

 

17

 

 

 

 

 

$

41,974

 

$

60

 

$

60

 

 

The following tables present the average balance of impaired loans and interest income and cash basis interest recognized for the three month periods ending June 30, 2014 and June 30, 2013, excluding performing troubled debt restructurings as allowed by ASC 310-40.

 

Three months ended June 30, 2014

 

Average
Balance
Impaired Loans

 

Interest
Income
Recognized

 

Cash Basis
Income
Recognized

 

Commercial

 

 

 

 

 

 

 

Commercial & Industrial

 

$

280

 

$

4

 

$

4

 

Agricultural

 

206

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

Farm

 

871

 

 

 

Hotel

 

5,775

 

 

 

Construction and development

 

200

 

 

 

Other

 

10,612

 

23

 

23

 

Residential

 

 

 

 

 

 

 

1-4 Family

 

7,890

 

1

 

1

 

Home Equity

 

2,783

 

6

 

6

 

Consumer

 

 

 

 

 

 

 

Direct

 

106

 

2

 

2

 

Indirect

 

5

 

 

 

 

 

$

28,728

 

$

36

 

$

36

 

 

Three months ended June 30, 2013

 

Average
Balance
Impaired Loans

 

Interest
Income
Recognized

 

Cash Basis
Income
Recognized

 

Commercial

 

 

 

 

 

 

 

Commercial & Industrial

 

$

1,183

 

$

2

 

$

2

 

Agricultural

 

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

Farm

 

1,437

 

8

 

8

 

Hotel